Source: Money Marketing
Summer is drawing closer, and spring is the time for all those avid gardeners to prepare their allotment plot for the growth season ahead. Having just completed our six-monthly review of the fixed income sector we found that there are some analogies between an allotment plot management and investing.
You get out of investing what you put in
It is a busy period preparing an allotment plot for summer, but once June comes around you can sit back and let the magic happen. The same could be said for the fixed income sector, being active managers that invest in active fund managers the more effort put in now, the potential for rewards in future.
Like an allotment plot, having a range of bulbs, seeds, and plants, it is crucial to have fixed exposure in most mandates. With investing the range of needs differ, with some having a greater focus on the income component of fixed income assets to those that are more focused on absolute return and a complement to more volatile assets, such as equities.
Last year was volatile for all asset classes and fixed income was no exception. When the Covid-19 crisis struck, there was a rush for the door in March which brought with it a window of opportunity. This was exacerbated by forced selling from the price insensitive areas of the market. Ironically, it was often higher quality debt that was sold as people scrabbled to raise cash in such an uncertain environment. We also saw a lot of opportunistic raising of cash by companies who looked to ensure their survival by replacing cashflow with debt.
In such a volatile market, active managers stepped in where they saw mispriced securities, buying the debt of quality companies at cheap prices, or higher yield or lower quality companies at even cheaper prices, if they thought they would survive longer term.
Removing the weaker plants
When it comes to planting beetroot in an allotment plot, this must be done in stages for two harvests. For successful growth you need to be disciplined with weeding out the weaker plants. Failure to do this will result in an inferior crop. That’s what active fund managers are mandated to do.
The low interest rates have meant that credit has now retraced much of the ground it lost in 2020 and is in many cases back to pre-Covid levels.
The headline risks that had been worrying the market, such as the US presidential election and Brexit, has quietened down and good news, such as the vaccine roll out, has been factored into the price. Allocating credit and structuring to give the best risk-adjusted return for the desired outcomes in the depths of the crisis bought opportunity for each mandate. Those that had been more aggressive in their positioning through the volatility have started rotating into lower risk opportunities and taking a more defensive stance.
Growth is on the horizon
In more recent months we have started to see a change in the view of the market, with the potential for a rise in longer term interest rates as we see economic recovery as the globe awakens after mass vaccination. Initially this was reflected in the inflation-linked market but there has been a marked shift in the compensation which the bond market has been demanding to lend to governments, signalling a change in expectations.
We have seen a steepening in yield curve. This is just one of the many areas where active managers can also add value as we see the various factions try to establish the right level of yield further out in time. Central banks have been explicit in expressing the need for a little inflation; however, they will be keeping an eye on the cost of servicing the extraordinary debt pile that is held across government and corporate balance sheets.
Like the rotating seasons, changes in market environment means it is essential to adapt, time each seed planting and be disciplined in weed management to ensure maximum growth.